UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
OR
Commission File Number: 1-16129
FLUOR CORPORATION
One Enterprise Drive, Aliso Viejo, CA 92656
(949) 349-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
As of April 30, 2003, there were 81,518,560 shares of common stock outstanding.
TABLE OF CONTENTS
March 31, 2003
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
FLUOR CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF EARNINGSThree Months Ended March 31, 2003 and 2002
UNAUDITED
See Accompanying Notes
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FLUOR CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2003 and December 31, 2002
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FLUOR CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
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FLUOR CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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FLUOR CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
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The current status on matters in the dispute resolution process is as follows:
Murrin Murrin
Disputes between Fluor Australia and its client, Anaconda Nickel (“Anaconda”), over the Murrin Murrin Nickel Cobalt project located in Western Australia were partially resolved through arbitration during the third quarter of 2002. The first phase of the arbitration hearing was completed in May 2002 and a decision was rendered in September 2002 resulting in an award to Anaconda of A$147 million (subsequently amended to A$150 million [US$84.0 million]) and an award to Fluor of A$107 million [US$59.9 million] for amounts owing from Anaconda under the contract. The company anticipates recovering the $84.0 million award plus legal fees, interest and other costs from available insurance. Insurance carriers have initiated certain proceedings seeking to limit their coverage. The trial court has entered a ruling dismissing these proceedings against the company.
The second phase of the arbitration will be heard in late 2003. The company does not anticipate that there will be any material impact to the company from proceedings under the second phase of arbitration.
Fluor Daniel Intercontinental and Fluor Arabia Ltd. v. General Electric Company, et al U.S.D.C., Southern District Court, New York
In October 1998, Fluor Daniel Intercontinental and Fluor Arabia Ltd. filed a complaint in the United States District Court for the Southern District of New York against General Electric Company and certain operating subsidiaries as well as Saudi American General Electric, a Saudi Arabian corporation. The complaint seeks damages in connection with the procurement, engineering and construction of the Rabigh Combined Cycle Power Plant in Saudi Arabia. Subsequent to a motion to compel arbitration of the matter the company initiated arbitration proceedings in New York under the American Arbitration Association international rules. The evidentiary phase of the arbitration has been concluded and a decision is expected in the latter part of 2003.
Dearborn Industrial Project
The Dearborn Industrial Project (the “Project”) started as a co-generation combined cycle power plant project in Dearborn, Michigan. The initial Turnkey Agreement, dated November 24, 1998, consisted of three phases. Commencing shortly after Notice to Proceed, the owner/operator, Dearborn Industrial Generation (“DIG”), issued substantial change orders to Duke/Fluor Daniel (“D/FD”) enlarging the scope of the project.
The Project has been severely delayed with completion of Phase II. DIG has unilaterally taken over completion and operation of Phase II and is commissioning that portion of the plant. Shortly thereafter, DIG drew upon a $30 million letter of credit which D/FD expects to recover upon resolution of the dispute. D/FD retains lien rights (in fee) against the project. In October 2001, suit was commenced in Michigan State Court to foreclose on the lien interest.
On December 12, 2001, DIG filed a responsive pleading denying liability and simultaneously served a demand for arbitration to D/FD claiming, among other things, that D/FD is liable to DIG for alleged construction delays and defective engineering and construction work at the Dearborn plant. The court has ordered the matter to arbitration. However, the order to arbitration is now being appealed by D/FD and therefore the order to arbitration is uncertain.
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Butinge Nafta Oil Terminal
On March 10, 2000, Butinge Nafta (“Nafta”) commenced arbitration proceedings against Fluor Daniel Intercontinental (“FDI”) concerning a bulk oil storage terminal (the “Facility”) located in Lithuania alleging, among other issues, that FDI represented costs in excess of actual estimates. FDI vigorously disputes and denies Nafta’s allegations. FDI engineered, procured and managed the construction of the Facility on a lump sum basis. On June 21, 2000, Fluor filed a separate arbitration against Nafta to recover delay/disruption damages caused by Nafta, as well as compensation for out of scope services. The first hearing on the merits of the case was conducted in late May 2001 with an additional hearing in June 2002. Final legal submissions and arguments were completed in September 2002. The parties are engaging in a mediated resolution process. A decision on the arbitration is expected in the second quarter of 2003.
Hamaca Crude Upgrader
The Hamaca Crude Upgrader Project located in Jose, Venezuela is a $1 billion lump sum project of Grupo Alvica (“GA”), a joint venture including Fluor Daniel (80 percent) and Inelectra S.A.C.A. (20 percent), to design and build a petroleum upgrader for a consortium of owners called Petrolera Ameriven (“PA”) including Petroleos de Venezuela S.A. (“PDVSA”), ChevronTexaco and ConocoPhillips. The joint venture is continuing to actively pursue two issues that were referred to arbitration in December 2001: one is responsibility for costs arising from the site labor agreement for 2000 called “Acta Convenio” and two, modifications and extra work arising from differing site soil conditions. The hearings on the fundamental cost differences between the earlier 1998 labor agreement and the 2000 Acta Convenio will be concluded in June 2003. The site soil conditions issue was the subject of hearings in November 2002 on both schedule and cost issues. There are no cross-claims by PA in the arbitration. Recent events in Venezuela are having a significant impact on the progress of the project. In accordance with the contract, the joint venture is entitled to cost and schedule relief for the impact of the recent national strike.
The client has conditionally accepted responsibility relating to the soil conditions and certain incurred costs have been paid. Substantial additional costs are expected to be incurred as the project progresses and resolution of outstanding issues concerning the total costs to be reimbursed under the soil conditions change order are yet to be determined. The amount of the claim for site soil conditions is $159 million, $28 million of which has been conditionally paid by the client. The company is accounting for the additional costs incurred for the soil conditions matter as additional revenue as payments are received. The amount of the claim for Acta Convenio is $210 million and no payments have been made by the client relating to this issue. Incurred costs associated with Acta Convenio and soil conditions are being deferred and will be recognized in revenue when a change order is approved or payment is received. As of March 31, 2003, the company’s share of incurred costs amounting to $68.6 million has been deferred. If future costs relating to Acta Convenio, soil conditions or the recent national strike are determined to be not fully recoverable, the company could face reduced profits or losses on this project, along with lower levels of cash.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the condensed consolidated financial statements and accompanying notes and the company’s December 31, 2002 annual report on Form 10-K. For purposes of reviewing this document, “operating profit” is calculated as revenues less cost of revenues excluding: corporate administrative and general expense; interest expense; interest income; domestic and foreign income taxes; other non-operating income and expense items; gain or loss on discontinued operations and cumulative effect of change in accounting principle.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made herein, including statements regarding the company’s projected earnings levels, new awards and backlog levels and the implementation of strategic initiatives and organizational changes are forward-looking in nature. These forward-looking statements reflect current analysis of existing information and are subject to various risks and uncertainties. As a result, caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, the company’s actual results may differ materially from its expectations or projections. Factors potentially contributing to such differences include, among others:
While most risks affect only future costs or revenues anticipated by the company, some risks may relate to accruals that have already been reflected in earnings. The company’s failure to receive payments of accrued amounts or if liabilities are incurred in excess of amounts previously recognized a charge against future earnings could result.
Additional information concerning these and other factors can be found in press releases as well as periodic filings with the Securities and Exchange Commission, including the discussion under the heading “Item 1. Business-Other Matters-Company Business Risks” in the company’s Form 10-K filed March 31, 2003. These filings are available either publicly or upon request from Fluor’s Investor Relations Department: (949) 349-3909. The company disclaims any intent or obligation to update its forward-looking statements, whether as a result of new information, future events or otherwise.
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RESULTS OF CONTINUING OPERATIONS
Revenues from continuing operations for the three months ended March 31, 2003 were $2,077.0 million compared with $2,506.6 million for the 2002 comparison period. Earnings from continuing operations for the three months ended March 31, 2003 were $40.9 million compared with $36.2 million for the three months ended March 31, 2002.
Consolidated new awards for the three months ended March 31, 2003 were $2.6 billion, level with the 2002 comparison period. Included in new awards is the $1.3 billion Tengizchevroil project (“TCO”), a major oil and gas development program in Kazakhstan. Consolidated backlog at March 31, 2003 was $10.3 billion compared with $11.6 billion at March 31, 2002. Approximately 65 percent of consolidated new awards for the three months ended March 31, 2003 were for projects located outside of the United States. As of March 31, 2003, approximately 48 percent of consolidated backlog relate to international projects. Although backlog reflects business which is considered to be firm, cancellations or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, deferrals and revised project scope and cost, both upward and downward.
OIL & GAS
Revenues and operating profit for the Oil & Gas segment are summarized as follows:
In the first quarter of 2003, the company made a change in this business segment. The newly named Oil & Gas segment, formerly Energy & Chemicals, will focus on oil and gas and larger petrochemical opportunities. Prospective downstream bulk and specialty chemicals projects will be executed by and reported in the Industrial & Infrastructure segment. All prior periods have been restated to reflect this change.
Revenues declined slightly in the first quarter of 2003 compared with the 2002 period. Operating profit declined from the first quarter in 2002, reflecting a shift in the proportion of current projects from higher-margined preliminary studies and engineering work to the execution stage of full engineering, procurement and construction.
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New awards for the three months ended March 31, 2003 increased significantly to $1,423.7 million, reflecting the previously mentioned TCO project, compared with $432.5 million in the 2002 comparison period.
Backlog at March 31, 2003 was $2,943.3 million compared with $3,368.9 million at March 31, 2002.
INDUSTRIAL & INFRASTRUCTURE
Revenues and operating profit for the Industrial & Infrastructure segment are summarized as follows:
Beginning in the first quarter of 2003, the Industrial & Infrastructure segment includes downstream bulk and specialty chemicals projects formerly reported in Energy & Chemicals. All prior periods have been restated to reflect this change.
Revenues for the first quarter increased 12 percent compared with the 2002 period. Operating profit as a percentage of revenues declined in the first quarter of 2003 compared with the prior comparable period due to a greater proportion of construction management in the mix of work, which typically generates lower margins but a higher return on assets and human resources.
New awards for the three months ended March 31, 2003 were $603.0 million compared with $716.9 million for the 2002 comparison period. New awards in the current period includes several life sciences projects, renewed activity with a valued client in the consumer products industry, and a project in the commercial and institutional market.
Backlog increased 24 percent to $4,184.9 million from $3,366.4 million in the first quarter last year.
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POWER
Revenues and operating profit for the Power segment are summarized as follows:
Revenues for the quarter decreased significantly compared with a year ago reflecting a sharp decline in procurement and construction activity. Operating profit improved significantly from the prior comparable period. The increase is due to the combination of the absence of higher costs related to certain legacy projects nearing completion a year ago, and a concentration of projects in the current period that are nearing completion where profit recognition is strongest.
As expected, new project awards were modest for the first quarter of 2003, totaling $87.8 million compared with $791.2 million in the prior comparable period, as demand for new power generation has declined as existing capacity is expected to meet anticipated demand. Backlog at March 31, 2003 was $780.2 million compared with $2,337.1 million at March 31, 2002.
GLOBAL SERVICES
Revenues and operating profit for the Global Services segment are summarized as follows:
Operating profit for the first quarter of 2003 increased nine percent compared with the comparable prior year period due to improved operating performance while revenues declined slightly.
New awards and backlog for Global Services reflects Operations and Maintenance activities. The equipment, temporary staffing and global sourcing and procurement operations do not report backlog due to the short turnaround between the receipt of new awards and the recognition of revenue. New awards for the three months ended March 31, 2003 was $359.4 million compared with $615.4 million in the first quarter of 2002. Project selectivity and depressed economic conditions in the manufacturing sector continue to affect new award levels from period to period. It should be noted that the first quarter typically benefits from annual contract renewals.
Backlog at March 31, 2003 was $1,694.4 million compared with $2,069.4 million at March 31, 2002.
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GOVERNMENT
Revenues and operating profit for the Government segment are summarized as follows:
Improved operating performance on projects in Alaska and the Middle East contributed to a significant increase in operating profit for the first quarter of 2003 compared with the first quarter of 2002. Operating profit includes a modest contribution from Del-Jen, Inc. which was acquired in the first quarter of 2003. Revenues increased 57 percent for the three months ended March 31 2003 compared with the 2002 period.
New awards increased substantially to $144.6 million from $14.5 million a year ago. Included is additional scope work for the Midcourse Missile Defense project in Alaska and a new order related to the AFCAP contract. New awards for the Government segment vary considerably from quarter to quarter and are typically higher in the third quarter when funding is renewed on two major DOE projects.
Backlog at March 31, 2003 increased 60 percent to $700.2 million from $436.4 million in the first quarter of last year.
OTHER
Corporate general and administrative expense for the three months ended March 31, 2003 was $36.7 million compared with $33.5 million in the 2002 period due to increased overhead costs for corporate services. Net interest income for the three months ended March 31, 2003 was $0.6 million compared with $0.5 million for the 2002 period.
The effective tax rate on the company’s continuing operations for the three months ended March 31, 2003 and 2002 was 32.5 percent.
MATTERS IN DISPUTE RESOLUTION
As of March 31, 2003, several matters on certain completed projects are in the dispute resolution process. The following discussion provides a background and current status of these matters:
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Fluor Daniel Intercontinental and Fluor Arabia Ltd. v. General Electric Company, et alU.S.D.C., Southern District Court, New York
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DISCONTINUED OPERATIONS
In September 2001, the Board of Directors approved a plan to dispose of certain non-core operations of the company’s construction equipment and temporary staffing operations. As of March 31, 2003, the company had substantially completed the sale or liquidation of its discontinued operations with the exception of one equipment dealership. While remaining open to a sale of the existing business, the company has initiated shutdown actions that will result in full liquidation of the business by the end of 2003.
In the first quarter of 2003, the company recorded an additional after-tax impairment provision of $13.5 million, including adjustments to deferred taxes, to recognize further deterioration in the fair value of the remaining equipment dealership due to continued severely depressed conditions in the equipment rental industry.
Operating results for discontinued operations in the three months ended March 31, 2003 was an after-tax loss of $0.1 million compared with after-tax earnings of $1.4 million in the same period last year. Operating results in the 2003 period consisted of earnings from the remaining equipment dealership operations and losses relating to closure of the temporary staffing operations.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” Pursuant to the requirements of this Interpretation, the company has consolidated two entities that own certain engineering office facilities, which are leased to the company. The company has no ownership interest in the companies that own the facilities but is deemed to be the primary beneficiary of the variable interests in these entities. The leases contain residual value guarantees, which totaled approximately $105 million at December 31, 2002. None of the terms of the leasing arrangements or the company’s obligations as a lessee will be impacted by this change in accounting. If the company defaults on the lease payments or were to fail to meet its obligation under the residual value guarantee, the lenders and owners of the entities could proceed with recourse actions against the company to enforce payment.
The company recognized an after-tax provision of $10.4 million for the cumulative effect of a change in accounting principle in the first quarter of 2003. The provision consists of the cumulative difference of rent expense previously recognized, compared with depreciation expense on the facilities and interest expense on the underlying financing, from inception of the leases through December 31, 2002. The impact to the company’s balance sheet was an increase in Property, Plant and Equipment of $108.2 million and an increase in long-term debt of $124.7 million. The long-term debt provides for interest only payments at interest rates based on a reference rate (LIBOR for the Aliso Viejo facility and Canadian banker's acceptance for the Calgary facility) plus a margin. Maturity on the debt coincides with the term of the leases, which expire in 2004 for facilities in Aliso Viejo and 2006 for facilities in Calgary. Rent payments are equal to the debt service on the underlying financing.
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FINANCIAL POSITION AND LIQUIDITY
During the first quarter of 2003, cash balances were reduced significantly as a result of reductions in advances on contracts in progress and the use of cash to fund two niche acquisitions.
In the first quarter of 2003, cash used by operating activities was $149.9 million. This is primarily due to the increase in operating assets and liabilities as advance payments from clients received in previous periods were used to fund projects in progress. Contributing to this was a reduction of $67.2 million in advances from the Duke/Fluor Daniel partnerships as several power projects are nearing completion and advance payment amounts previously received from clients are now being expended. In addition, client advances in the Oil & Gas segment primarily relating to the Hamaca project in Venezuela were reduced by approximately $70 million as the company funded progress on the project, including work that is subject to the dispute resolution process, during the recent national strike when payments from the client were slow. The work-off of power projects in progress coupled with cash outflows for the Hamaca project are expected to continue in the near-term and, when combined with the company’s cash flow from operations, could further reduce total cash by $100 million by the end of 2003. Also contributing to the decline were reductions in client advances on projects in other segments and various payments under incentive compensation plans, which are made in the first quarter for performance relating to the previous year. The levels of operating assets and liabilities vary from year to year and are affected by the mix, stage of completion and commercial terms of engineering and construction projects.
Cash used in investing activities in the first quarter of 2003 included $53.8 million for two niche acquisitions. Del-Jen, a provider of outsourcing services to the US Government was purchased for $32.6 million in cash and Plant Performance Services was purchased for $21.2 million in cash during the first quarter of 2003. The Plant Performance Services acquisition excluded working capital, which was retained by the seller. As a result, the company expects to provide funds for operating liquidity in the range of $20 to $30 million as may be required over the next several months. During the first quarter of 2002, $45.9 million in proceeds was generated from the sale of a discontinued equipment dealership. In addition, discontinued operations generated $18.9 million from the liquidation sale of equipment at one dealership and the AMECO operations in Argentina and Peru in the first quarter of 2002.
Cash utilized by financing activities primarily relates to payment of dividends ($0.16 per share) in both the first quarter of 2003 and 2002. In addition, in 2002 cash of $17.9 million was utilized to pay off short-term debt.
Liquidity is provided by customer advances on contracts in progress and the company’s proportional share of excess cash that has been advanced to the company by Duke/Fluor Daniel. If these customer advances are reduced through use in project execution and not replaced by advances on new projects, the company’s cash position will be reduced. This condition could result in the need to access funds for working capital in the commercial paper market from which it may borrow up to $290 million as supported by committed lines of credit with banks. In addition, the company has $117 million in available uncommitted lines of credit that can be accessed for general cash management purposes.
Off-Balance Sheet Arrangements
The company maintains a variety of commercial commitments that are generally made available to provide support for various commercial provisions in its engineering and construction contracts. The company has $340 million in short-term committed and $351 million in uncommitted lines of credit to support letters of credit. Letters of credit are provided to clients in the ordinary course of business in lieu of retention for performance and completion guarantees on engineering and construction contracts. Primarily as a result of the company’s strong credit standing which provides the availability of letters of credit capacity, retainage on engineering and construction contracts is minimal. The company also posts surety bonds to guarantee its performance on certain contracts.
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As of March 31, 2003, no material changes have occurred with regard to the company’s commercial commitments and contractual obligations as disclosed in the company’s December 31, 2002 annual report on Form 10-K.
The company has agreed to make available $100 million of letter of credit capacity to ICA Fluor Daniel for their projects. Additional Fluor support may be required as a result of the financial condition of Fluor’s partner.
In the ordinary course of business, the company enters into various agreements providing financial or performance assurances to clients on behalf of certain unconsolidated subsidiaries, joint ventures and other jointly executed contracts. These agreements are entered into primarily to support the project execution commitments of these entities. The guarantees have various expiration dates ranging from mechanical completion of the facilities being constructed to a period extending beyond contract completion in certain circumstances. The maximum potential payment amount of an outstanding performance guarantee is the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts.
Financial guarantees, made in the ordinary course of business on behalf of clients and others in certain limited circumstances, are entered into with financial institutions and other credit grantors and generally obligate the company to make payment in the event of a default by the borrower. Most arrangements require the borrower to pledge collateral in the form of property, plant and equipment which is deemed adequate to recover amounts the company might be required to pay.
As of March 31, 2003, no material changes to financial or performance assurances to clients have occurred since the filing of the company’s December 31, 2002 annual report on Form 10-K.
Financial Instruments
The company utilizes forward exchange contracts to hedge foreign currency transactions entered into in the ordinary course of business and not to engage in currency speculation. At March 31, 2003, the company had forward foreign exchange contracts of less than 18 months duration to exchange principally; Euros, British pounds, Canadian dollars and South African rand for U.S. dollars. The total gross notional amount of these contracts at March 31, 2003 was $7.8 million representing forward contracts to purchase foreign currency.
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Item 4. Controls and Procedures
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FLUOR CORPORATIONCHANGES IN CONSOLIDATED BACKLOGThree Months Ended March 31, 2003 and 2002
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PART II: OTHER INFORMATION
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CERTIFICATIONS
Certification of Chief Executive Officer
I, Alan L. Boeckmann, certify that:
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Certification of Chief Financial Officer
I, D. Michael Steuert, certify that:
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EXHIBIT INDEX
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